Science (?) And My Insurance BS Test

Richard Feynman defines science as the study of nature and engineering as the study of things we make. I like that logic and it makes the idea of an insurance company hiring a Chief Science Officer faintly ridiculous. Science today means ‘using tools that scientists use’.

Anyway, I have a test for the degree to which an article on insurance is BS or not. It’s the Climate Change Test. If the article or interviewee mentions climate change as a problem they want to think about in connection with insurance rates, they’re probably full of it.

My point is that big politicized science questions have no place at an underwriter’s desk: identifying claims trends is fine, but don’t dress the discussion up in some topic du jour just to pretend to be talking about something ‘people care about’. That’s pure, irritating status affiliation.

MB: For the present we’ll be organized such that the operational analytics will continue to reside in the business units. On one end of a continuum is the traditional loss modeling; on the other end we’ll be responding to things like climate change in partnership with institutions such as the RAND Corporation. On a scale of one to ten, the familiar operational analytics may be a “one” and collaboration with RAND might be a 10. The sweet spot for the office is probably between four and 10. I envision that the science team will support the businesses in questions that have been asked but not addressed because of immediate burning issues or haven’t been asked in the most cohesive way.

Jim Lynch is puzzled about whether this is an actuarial role or not. It sure is. In most companies, C-suite folks all have ridiculously busy jobs so can’t focus on data mining and statistical analysis. But most companies don’t employ hundreds of highly trained statisticians to think about these problems every day. AIG does.

Anyway, what’s his strategy? Go fancy:

MB: Commercial and personal property insurance is largely about low-frequency, high-severity risk. The industry has tried with limited success is to model that risk through traditional analytic techniques. However, there remains a huge amount of volatility associated with an insurance company’s finances. We hope to explore ways of thinking about risk questions differently, approaching them from a different angle while leveraging relevant data. It’s more than a matter of using traditional and even non-traditional statistical analysis; it’s about bringing game theory, possibly real options theory and more broadly about reshaping the approach fundamentally to gain new insight into how to manage claims and better understand low-frequency, high-value events.

He’s been an internal consultant in insurance for 10 years. I’ll be surprised if he can come up with ways of out-analyzing the teams of actuaries AIG employs.

*Bad writing award for this line from his CV:

Creating and leading the team challenged to inculcate science driven decision making into an organization that has achieved great success by making heuristic decisions on the backbone of its sales force.

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Not Unreasonable is a blog and podcast by David Wright, an actuary and reinsurance broker at Beach, a global reinsurance intermediary. Born and raised in Canada, David moved to the New York area in 2010 and lives in Northern New Jersey with his wife and three children.